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Are ‘Music’ Record Labels Still Needed?

When coming to the Internet and music, there has been a long history of disruptive innovations, which some have caused controversy in online marketplace, but most of them have changed the music business and its revenue flow model.

In April 2000, Prince, also known as The Artist Formerly Known as Prince, became the first subject ever, to trade music online, in terms of pay-to-download. He released his remix album, “Rave In2 the Joy Fantastic”, exclusively through his NPG Music Club. That was in the year 2000, and the music industry should have seen this coming, but they stayed asleep, while the online music marketplace moved forward, evolved, and embraced the new business model, a no-revenue generation model as opposed to the traditional brick-and-mortal music stores.

The article, How Much Music is Worth, which was published in the Newsweek magazine, of October 29, 2007, further describes the disruptive online marketplace for the music industry. The article talks about the British rock band, Radiohead, which caused even further controversy in online music marketplace.

The band produced its much anticipated new CD, “In Rainbows”, but didn’t release it in the old fashion way, but made it available for download online. Not for-pay to download, such as what Prince did in April 2000, but for Radiohead, anyone could download its newly produced CDless music from the band’s official web site, and the twist to this was; there was no price tag on it, for what the user should pay to download the music.

The band left the price field empty left it up to the user to decide how much to leave in the band’s eshopping cart for downloading its songs. That’s right, you could download the entire new CD, without paying a dime, it’s up to you to decide how much to pay. But to get an unprotected code, a user is required to pay only $0.90, so you could download and play the songs on any device such as iPods, Zunes, and PCs.

The article reports that in the first few days of the band releasing their new eCD, over 1.2 million visitors to its web site downloaded “In Rainbows”. The article further states that consensus survey found that many customers paid $5 to $15 to download the band’s music, while some paid nothing.

But that’s not the whole story; the music industry has long been faced trouble, with users downloading songs online for free. It all started with the then Napster, which allowed the sharing and downloading of music online by anyone, anywhere. This led to the music industry scrambling to file lawsuits for anyone and everyone who downloaded their music online. To which they had no success, because two weeks ago, the music industry organization RIAA announced that it will no longer file lawsuits for sharing and downloading songs online for free.

Steve Jobs, founder of Apple, seemed like he was the long awaited savior of online music, with his introduction of IPod and iTunes Music Store.

However, to make it even worse, Steve negotiated with the music record labels to sell songs on Itunes Music Store for a flat fee of $0.99 per each song and only $10 per each CD download. This price is rather ridiculously low compare to the traditional CD pricing, which can rack up to $17 per CD, but with that, you get a CD with all kinds of songs, even those you don’t like. But, with online music, you get to pick which one you want and don’t want. The music industry went along with Steve’s proposal. However, they became unhappy because they realized that Steve was making more money selling iPods, than they do selling songs.

The article asks if $0.99 is the right price paid for each song on Steve’s iTunes Music Store. The answer is no. But it caused a high price elasticity of demand for online music trading.

“In general, as the price of a good rises, consumers will usually demand a lower quantity of that good; they may consume less of that good, substitute it with another product, etc. Actually, the greater the extent to which demand falls as price rises, the greater is the price elasticity of demand. Conversely, as the price of a good falls, consumers will usually demand a greater quantity of that good: consuming more of that good, while dropping substitutes” (Wikipedia.org).

In this case, as the price of music falls due to the downloading and sharing of songs online for free, the greater the demand, causing the price elasticity of demand to skyrocket. This in part is due to the fact that, even if consumers have no substitute for music, it’s not like, when the price of music rises, that consumers will replace it with something else, they just stop demanding for more. But now, they have more option on where to buy or share their music, or rather, where to download, at the lowest price and sometimes for free. And, free is always better when coming to music.

Newsweek Magazine should not have asked how much music is worth, but whether Record Labels are still needed, given that any artist can now release an album or in this case, an eCD, and make it instantly available to the general Internet users, without involving the Record Labels’ bureaucracy.